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UQM Technologies (NYSEMKT:UQM)

Q2 2013 Earnings Call

October 25, 2012 4:30 pm ET

Executives

Annie Leschin

Eric R. Ridenour - Chief Executive Officer, President and Director

Donald A. French - Chief Financial Officer, Principal Accounting Officer, Treasurer, Secretary and Director

Jon Lutz - Vice President of Engineering

Analysts

Michael Lew - Needham & Company, LLC, Research Division

Rob Young - Wm Smith & Co.

Jeff Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Randall Hough

Operator

Good day, ladies and gentlemen and welcome -- thank you for standing by. Welcome to the UQM Fiscal Year 2013 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, October 25, 2012. I'd now like to the conference over to Annie Leschin. Please go ahead.

Annie Leschin

Thank you, operator. Before we begin, I'd just like to review the forward-looking statements. This conference call may contain statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These statements include comments regarding our plans, beliefs or current expectations, including those plans, beliefs and expectations of our officers and directors with respect to, among other things, future orders to be received, future shipments and payments under our supply agreement with CODA Automotive, future financial results and the continued growth of the electric-powered vehicle industry. Important risk factors that could cause actual results to differ from those contained in the forward-looking statements are contained in our Form 10-Q filed today.

Now I'd like to turn it over to Eric.

Eric R. Ridenour

Thanks, Annie, and welcome to the Fiscal Year 2013 Second Quarter Conference Call. Our second quarter can best be summarized as follows. With the strategic progress to expand into new business opportunities across different regions and segments and good progress in many of our current customers and potential new customers offset by lower revenues, driven mainly by a lack of shipments to CODA who remains in the slow ramp phase.

Overall revenue was down 49% this quarter to $1.2 million from $2.3 million, and our net loss increased to $2.6 million or $0.07 per share versus $1.6 million or $0.04 per share. Donald will take you through the rest of the financial results later.

Let me start by discussing the status of the continued slow ramp for CODA. CODA continued to build and ship units during the quarter, but due to the current inventory level of UQM Systems in China, they did not require us to ship any additional production units, nor did we receive any new payments during the quarter. Obviously, we're disappointed by that, but we believe that CODA will be back again on plan soon, based on both recent public comments from them and conversations with them.

In an extensive interview with Automotive News on October 8, 2012, Phil Merta, CEO of CODA, reiterated many of the comments we discussed on our last conference call. Specifically, Phil stated, and I quote, "We're still really confident. When I talk with the 4 dealers we have, they're beating the smack out of me for more cars, they're telling me that there is very real demand out there." He also stated that they intend to open to as many as 40 U.S. dealerships by next summer, including 10 by year end. CODA expects about 20 of those to be in large Metropolitan markets, and they expect to sell about 30 new cars per month in those dealerships, for the remaining 20 in smaller markets where the expectation is closer to 10 a month. Thomas Haus, Senior Vice President for Marketing for CODA, added that they already have signed letters of intent to open 25 of those dealerships, mostly in the New York/Tri-State area, greater Chicago, North California.

CODA also revealed in that article that it's seeking additional funding to facilitate its $150 million 2012 equity offering. The current financial marketplace has been difficult for many companies, and I talked to CODA's CFO this week, and he tells me that CODA is optimistic and continues to have progress. While we did not know the level and speed of the vehicle production ramp, which will be dependent in part on CODA's current fundraising, based on what they had shared, we are optimistic that they will overcome these challenges shortly.

Meanwhile, our progress continues with the next-generation great wall product plan for CODA. We have finished technical review in the specifications phase and have submitted a formal quotation on the program. We feel very confident that we have achieved an excellent technical offering at a competitive price point. We will continue to work hard to win this business as Great Wall reviews our proposal along with others.

And from a strategic standpoint, we made solid progress this quarter towards expanding our presence and growing our customer base worldwide. First, we're pursuing a new variety of new business opportunities across regions and segments to grow and diversify our top line revenue. Secondly, we continue to work to meet and exceed our current customers' needs and expectations and to grow with them. And finally, we continue to invest in critical product advancements such as our new 50%-reduced site controller and a next-generation motor to make sure we stay at a forefront of EV and hybrid technologies and continuously improve our systems and processes to ensure high-quality efficient production.

Now we have a number of achievement this quarter. The most significant was the MOU that we signed with a large Chinese industrial company to develop and distribute our PowerPhase products for vehicle manufacturers in China. Now just to be clear, this MOU is an addition to the work we have with Great Wall. As you know, we have invested a great deal of time and devoted many resources to understanding this market and the competitive landscape so we could ensure that we find the best partner to gain access to this enormous opportunity.

With the strong push from the Chinese government, which is preparing to invest $15 billion over the next 5 years, the new energy vehicle market in China is projected to reach 500,000 vehicles by 2015 and 5 million vehicles by 2020.

We have met a variety of OEMs, suppliers and other significant industrial companies looking for the optimal partners for UQM. We have narrowed it down to a small handful of potential partners, and we continue to have discussions with for potential collaboration. This particular company was one of those selected, and although we cannot yet release their name, this is a well-known company with revenues of USD 5 billion and facilities throughout China. We chose to join forces with this particular company, given its strong local reputation and long-standing relationships in the marketplace. Now we know our partner had a similar selection process, and that they told us that they searched worldwide and talked with many of our competitors. This company selected UQM because of our state-of-the-art technology, high-efficiency systems and global reputation. We are very excited by this opportunity, honored to have been chosen by this company and very optimistic that we will be able to move forward and position ourselves to capture a significant portion of this growing market. The next step will be what we call the detailed project phase, and that's where we have jointly shared market data, customer requirements, volumes and performance specifications to build the business case. We'll also determine the best way to partner and capture this market, whether that'll be on a project basis or as a joint venture or other means.

Currently, there are multiple projects with various timelines. Some of which involve minor modifications to our current products and others which are entirely new products. Now while we're at the very early stages of this relationship, we see this as an important major step in this process and we look forward to a long-term successful relationship.

Next, we announced another application of our products for the marine marketplace with the launch of the Mylne Bolt 18 yacht tender, which debuted in September in the 2012 Monocle Yacht Show. Mylne Bolt works has been around more than a century crafting exceptional yachts. They have recently decided to electrify their fleet, and this yacht tender is the first product for them. It's powered enough to accelerate from 0 to 30 in 3 seconds and to tow water skiers. They're utilizing our PowerPhase 100 kilowatt propulsion system down in the Marine configuration by ReGen Nautic.

They also plan on offering electric propulsion system in their larger luxury selling yachts where electric motors are well suited, allowing effortless, quiet and smoke-free docking and maneuvering prior to getting the sails up.

We also announced the fleet of all electric taxis that were used in the London Olympics this summer. These iconic taxis used our PowerPhase Pro 100 systems. These vehicles were well-received, had very strong performance and offered an additional potential market segments for us in urban taxi fleets. We continue to build and ship for EVI for its UPS order. EVI has begun to ship completed trucks to UPS as well.

Proterra formally announced that it completed the Altoona testing required by many municipalities before they're allowed to purchase buses, the rigorous regimen that simulates 12 years and 500,000 miles of heavy-duty bus usage. Proterra is the only electric bus to pass this rigorous test and also to receive card certification as a 0-emission bus. Proterra just announced that they also received 5 new orders for buses from Tallahassee, Florida. With this certification in hand, we would anticipate Proterra orders to increase.

And then finally, Saab, who most recently finalized its new company NEVS [ph] on August 31. As Saab builds its management team over the next few months, I'm excited to report that its new Chief Technical Officer who has been named is someone who we know well and worked with us in the original program at Saab. Well, he's very familiar with UQM and our product offering. We have told him that once his new team is in place, we are prepared to meet with him and familiarize the rest of his team to our product benefits and our ability to provide prototype of production systems immediately.

In summary, although our results this quarter were disappointing from a revenue standpoint, mainly due to CODA, we are optimistic that we will return to their ramp-up plan shortly. And in the meantime, we continue to make solid progress on our strategic initiatives to expand customer base and segment opportunities, to meet our current customer's needs and work to improve our systems and processes, to ensure the highest quality of products.

And now I'll turn it over to Don French, our CFO, with details on the financials.

Donald A. French

Well, thank you, Eric, and good afternoon, everyone. I'd like to talk first about the second quarter numbers. Total revenue for the second quarter was $1.2 million, down substantially from the $2.3 million for the second quarter last fiscal year. The decrease was primarily attributable to delays in expected CODA shipments and the timing of low-volume product shipments. Together, these factors resulted in product sales declining to $800,000 for the current quarter versus $2.2 million for the same quarter last year. Meanwhile, contract services revenue increased to $400,000 in the quarter versus $100,000 a year ago, reflecting increased activities on an onboard vehicle power generation program and on our rare earth magnet development program with the U.S. Department of Energy.

Total gross margins decreased to 38.8% during the second quarter, versus the 43.7% for the second quarter last fiscal year. The decrease was driven by a 5.6 point -- 5.6 point decline in product margins resulting from decreased overhead absorption and changes in product mix.

Production engineering expenses before DOE reimbursements fell slightly to $1.5 million this quarter versus $1.6 million in the same quarter last year when we had a higher-than-normal engineering activity as we completed final preparation for CODA's production launch. We expect production engineering expenses to remain at similar levels to this quarter going forward as we continue development activities for customers and design our next generation of PowerPhase products for the automobile truck and bus markets. Reimbursements of product qualification and testing costs under the DOE grant during the quarter were 64.2% versus 68.5% for the same quarter last year. This reduced reimbursement rate is due to lower overhead burden during the quarter versus the same quarter last year.

Selling, general and administrative expense for the quarter increased to $2.5 million versus $2.1 million a year ago. The increase resulted from higher business development, marketing and travel expenses associated with our strategy to enter the China market and new business development activities to expand our customer base worldwide. Just as a note, approximately 2/3 of the growth in SG&A will be ongoing, reflecting our staffing and robust business development activity, which we believe is an important investment in the future growth of the business. The remaining increase in SG&A was due primarily to recruitment and relocation of additional key personnel and certain legal cost.

Summing it up for the quarter, net loss was $2.6 million or $0.07 per share. This compares with a net loss of $1.6 million or $0.04 per share for the comparable quarter last year. Capital expenditures for property and equipment before reimbursements for the DOE grant were $107,000 for the quarter, and this compares to $439,000 for the same quarter last year.

Briefly looking at the 6-month results. For the first half of the year, total revenue was $3.6 million, essentially flat with total revenue for the same period last fiscal year. Net loss for the 6 month period was $3.9 million or $0.11 per common share. This compares to a net loss of $2.6 million or $0.07 per common share for the comparable period last year. The increase in net loss for the first half resulted from lower product sales, reduced product margins and increased selling, general and administrative costs I discussed earlier.

Turning our focus to financial condition and liquidity, the company continues to be in a strong financial position and remains well-capitalized. At the end of the quarter, we had cash and short-term investments of $7 million and working capital of $22.5 million. Our cash used in operations for the 6-month period was $4.9 million, of which approximately $2.4 million were used to fund operating losses and $2.9 million was for inventory purchases. Keep in mind that when CODA resumes shipments over the next few quarters, we expect our cash flow and working capital improve as CODA related inventory declines. Additionally, we do not anticipate any significant near-term -- short-term capital expenditures.

In addition to our core liquidity, our expenditures on future development activities and equipment will be aided significantly by our $45 million DOE grant, of which approximately $26 million remains available to fund these activities until January of 2015.

At this point of like to open the call up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from line of Michael Lew with Needham.

Michael Lew - Needham & Company, LLC, Research Division

I got a couple of questions. First with regard to the China MOU, what inning currently would you say that you're in before the entity could be identified?

Eric R. Ridenour

I'd say the early innings obviously, were not in the first inning, but we're in the early innings. This is an important step because, again, there's a lot of work that goes into get to this point to where you have a relationship such with enough trust and mutual respect to be able to go forward, and we've reached that. Our partner is, we mentioned, looked at a number of other companies as they also looked at us. And so as well, we are evaluating companies, they're evaluating companies, and we both came to the conclusion that we looked like a very good fit. And so now it's the deeper dive into the details. We have the high-level, but now we're going into the deeper dive that will begin in the next few weeks. And then after you get through that, kind of the contract phase, you then move into the actual details of the contract, and then finally, government approval.

Michael Lew - Needham & Company, LLC, Research Division

So with regard to the milestones you just highlighted, the additional work that's has to go, will -- I mean, the next announcement, regardless, will be the identification of a part of who the entity is? Or do you think you'll be able to talk a little bit more about how far along this is progressing or...

Eric R. Ridenour

Yes, I would think that our next milestone from a standpoint of reporting would probably be around the specific projects, including the partner's name and more details on that. We'll see as it goes forward. But that's kind of the discussions we've had with them is that is our next checkpoint.

Michael Lew - Needham & Company, LLC, Research Division

And also with regard to the challenge that Smith Electric had and the inability to raise public equity, do you believe that creates more opportunity for UQM, be it your partners in heavy-duty, for example, UPS?

Eric R. Ridenour

Well, certainly, like I said, there's right now a limited number of people out there selling into that commercial vehicle segment, and we have supplied 2 of them. So certainly, as sales move there, that's a good thing for us. So again, we never wish bad for anyone and never look to do that. But certainly as our partners get stronger, we get stronger. As we've said, one of our main strategic tenets is to continue to have a good relationship to both delight our customer and to meet their needs and to grow with them. Because, again, we look to grow with partners and have our success and their success be interplayed.

Michael Lew - Needham & Company, LLC, Research Division

And I also realized, obviously you don't have a crystal ball, but let's say for -- as when we're having this discussion, let's say, a year from now with you and Don, how many programs do you expect would've evolved to become meaningful revenue contributors and also, in which markets?

Eric R. Ridenour

Well, that's always tough, as you know. I guess obviously, the greater short-term one is and remains CODA. Beyond that, I think, we're watching as Proterra now has finished their milestones. They should start accelerating certainly EVI and Boulder EV are also in acceleration mode. So looking forward, they definitely see growth coming into next year. But I think for all these things that -- it will be a multi-year growth pattern, not just a single year. So it's not going to be a huge step function, but just a continual ramp up over the next few years. And then with the China and those types of things, I think you could see potential of some units moving out in that time period, and then more units that follow in the year after that and the years after that. And frankly, because it's a huge market, it's is going to grow to some very big numbers in a fairly short period of time. And then things like Saab as they come in under NEVS, we certainly expect that one of the things that's great about that is that our production line here is already ready to do those vehicles. We've done a lot of work with them. They seem to be anxious to get into the marketplace once they get the rest of the structure in place. And we're hoping that, that combination of a great product readily available and all that will all play dividends for them to grow into the market. So it's another one that's become fairly quickly depending on how it matures over this next months.

Operator

Our next question comes from line of Rob Young with William Smith.

Rob Young - Wm Smith & Co.

Relative to the inventory that has been shipped to China from a CODA perspective, do you have the numbers of how many -- how much inventory is out there? In terms of...

Eric R. Ridenour

Yes, we have it, but we won't share it, only because it's part of the agreement we have with CODA and specifically not -- they have been very careful not to release numbers on their own, and they certainly wouldn't want their suppliers to implicitly release numbers. So unfortunately, I would love to be able to, but we just can't.

Rob Young - Wm Smith & Co.

Right. Do you think that it would be reasonable for me to take the total revenue that you've gained from CODA and then estimate the average selling price? Is that a way to back into that number?

Eric R. Ridenour

Well, I think you'd get pretty close from the standpoint of total systems and then obviously, some of those certain vehicles that are sold, some of those certain vehicles that maybe went publicly, some of those are on boats and in various stages. So if you think about it in that total-cloth standpoint, that's a fairly decent approximation.

Rob Young - Wm Smith & Co.

Okay, okay. And so with these dealerships, they're not selling at those rates currently. Those are the rates that are presumed from now, I guess, until those dealerships are ultimately on the ground by the end of next calendar year.

Eric R. Ridenour

Yes, I think the expectation is, is that each of the dealerships are targeted into a metro area because those will be the first ones. And their expectation is for them to get to that unit. I think, as you know, with any new product, especially with a new brand and a new product, it takes both the product being there and then the advertising and marketing to get to them. There has been some amount of certainly Internet and viral marketing, billboards and others in those areas, but the big marketing push is still waiting for a little bit more inventory to build. And so those 2 things together would get them their expectation to the rates. In that article, one of the dealers was quoted very similar in numbers to what Phil said. So it appears that you don't need to wait to get to there, but certainly, it's all those confluence of factors coming together to kind of hit that number ongoing.

Rob Young - Wm Smith & Co.

Okay. Now CODA will not be the only vehicle within those dealerships, or will they?

Eric R. Ridenour

I'm not exactly sure of their model. What you normally find is that at least a portion of the showroom floor is dedicated. Sometimes, there's a requirement for the entire facility. I do know that most of the dealers that they're aligning with are multi-brand dealers. So this will be a portion. So it could be either a portion of a showroom that's already other types of vehicles, or it could be on the same basic lot but in a separate building or other things. I don't know enough in particular, but I do know those couple of factors that there are already major dealer groups. So they have a lot of experience in selling vehicles. They're not brand-new dealers who have to learn how to do all that. And then they have the other sales to help support their infrastructure as they're growing, which is what makes the most sense. So you don't have the strains on that individual dealer who are both ramping up the dealership and all the back office and generating revenue from sales. So I think those things will be helpful to get to that mix quicker and to be able to get through this, as always, a transition from 0 to something.

Rob Young - Wm Smith & Co.

Right. Can you recognize revenue once systems get to China? Is that how...

Eric R. Ridenour

Right. We recognize revenue, basically, FOB China as we deliver it to the port.

Rob Young - Wm Smith & Co.

Okay. And then I just have one last question. Have you noticed whether it be in China or just here in the States, that there is becoming increased pressure, increased, I guess, pessimism relative to the battery manufacturers having various financial issues? Has that come up? And has that played into a fact -- has that played into maybe a slower ramp from a CODA perspective?

Eric R. Ridenour

We haven't seen anything specifically with CODA at all because obviously, they're in their joint venture on the batteries. So they do have total control within that system. But certainly, with the few events that have happened, certainly it always creates media and media always creates it. But I think as the people that are in the actual decision-making, they're aware of the total structure. There's lots of battery manufacturers out there, some of them are significant, some of them are very strong players in many segments as being one of them. So they have great financial wherewithal and others. And so I think from the big-picture standpoint, these are just little perturbations into the system but obviously, they get great media play and I think they get overweighted for a short period of time.

Rob Young - Wm Smith & Co.

Do you, by chance, know what the cost of the batteries of the JV is producing? Do you?

Eric R. Ridenour

I actually don't have an official number, so I would be guessing regardless. I have heard some rumors, but obviously, I wouldn't be able to share it. But what I did hear, I can tell you is competitive or even better than competitive. But again, I don't know that as a fact.

Operator

Our next question comes from line of Brad Allen [ph], private investor.

Unknown Attendee

Yes, this is Brad Allen [ph], long-term investor. Just got a question to Don and then to Eric, I guess. Our inventory figures you released show that in the 6-month period, we've increased inventory some $3 million. How much of that was this quarter?

Donald A. French

I'm sorry, Brad [ph], would you say that again? I didn't catch all of it?

Unknown Attendee

Okay. Our -- your release says that our inventories have increased $3 million this 6-month period. Did you hear me?

Donald A. French

Yes.

Unknown Attendee

And I was wondering how much have we increased inventories this quarter?

Donald A. French

The increase in inventories this quarter, I believe, was about $1 million.

Unknown Attendee

So we slowed down the inventory build, I guess. Considering the loss, would -- I mean, is that something you guys are considering? Or what's the parameters that we would stop building inventory until we get sales going? What's your considerations there?

Eric R. Ridenour

Yes, let me give an answer to that. First up, within the CODA inventory build, that all happened earlier in the year and has been flat or improving through time because we basically had to build a certain amount of inventory to hit their forward-looking projections. And then with the slow ramp, we haven't added to that. Most of that inventory build is actually other customers who are asking for units. We've talked about the UPS build and Proterra builds and others. We need to get material on board to build those units and then those inventories will go down. So we look at each account separately, and we make a forward projection of usage and timing. Obviously, we have some elements that have fairly high lead, long-lead times even, for the normal industry because they're either offshore or because of the complexity or because it's -- that particular supplier has longer lead times. So we need to get out ahead of that in order to be able to build to the production schedule. So again, on CODA, we're done and we aren't adding into that inventory until we have such time that it gets down to a critical reorder quantity, which is some time in the future. And then the other inventories are building as they're ramping up. And again, they'll be pulling down, and we'll get to a balance. So at this point, we don't have -- in fact, if anything, I'd say over the next quarter or 2, we'll see those numbers coming down, not going up.

Unknown Attendee

Right. Is the requirement that we have for CODA a significant number or is it something that we can handle pretty well in-house? I mean, I guess as just a business person, I wonder at what point they would need to start paying for that inventory under their agreement.

Eric R. Ridenour

Well, again, the way the agreement is, it's pretty much the sold units or what's there. And from -- as we move forward, under a ramp, that's what we would expect. But again, the -- I guess, the one good cost of all the stuff is the cost of money right now is not excessively theirs, so that's a good thing. And if we are at high-interest times, obviously, that would be a much more pressing problem. But again, we essentially build to their forward projections. There is no specific requirement other than we need to meet the forward-projection schedules. We do a 3-month forward-looking forecast and then a 12-month extended looser forecast that has more ability to be flexible over time. And we look at those for all of our different customers, and that's how we try and gauge it so we can get a material in here in time to meet the requirements.

Operator

Our next question comes from the line of Jeff Osborne with Stifel, Nicolaus.

Jeff Osborne - Stifel, Nicolaus & Co., Inc., Research Division

I was wondering if you could, Eric, just update us on the Great Wall RFP that you responded to, when you would expect to hear back from that, kind of question one. And then question two, along the same line is, when would you expect that to be a volume vehicle?

Eric R. Ridenour

The RFQ response is always subject to the vagaries of the company, and they never quite give you it. And I think it gets a little even more complicated because it goes through CODA to Great Wall. They discuss it and then they get back to us, so I would expect that to actually be longer. It's not uncommon for those kinds of things to be 3, 4 months before you hear anything back. And it's also not uncommon sometimes for them to come back and try and sort of play the negotiation game. So they'll come back and say, well, we're going to take the top 2 or the top 3 guys and have you go into round 2 and all that stuff. So I've seen all of that. I don't know which particular game we'll play, but I've seen them all through my life. So one of those many will come to us. The good news is we work through them. Really, we're the one guy really working through them. So all the technical specifications and all that, we know the product very well. We kind of see it as ours to lose, but obviously, like I said, there's other players out there. And being a prudent fiduciary company, they're going to ask a lot of other people who'd give it. And most of those end up just becoming competitive weapons for them. They come back to us. But we do know their rough target for pricing, and we know where we were and we feel pretty comfortable that we've hit a good number that will be good for us and good for them. So we'll see how that plays out. The second item was the specific timing, and they've not released it. I think CODA mentioned it's a late 2013 or '14 program. And I don't -- I haven't seen a firm volume ramp schedule from them that would come later in this process. So we kind of do the targets based on sort of different annual volume levels. And then in this next phase, they'll come back with a more specific statement of both timing and levels through those timing periods.

Jeff Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Got you. And then as it relates to CODA, you mentioned in your prepared remarks about the 30 vehicles per month. Was that per dealer or across the 10 dealers that would eventually be opened up? I just wanted to be clear on that.

Eric R. Ridenour

No, what they were thinking is roughly 30 per dealer, per metro market kind of thing. So if you take their total number, you get to their original volume targets, and so you see how the math kind of works and how they got there. Again, they're going to target major metros where they think they have good matches. So again, as I mentioned, it was additional California and then Chicago seems to be a good spot for them and then Tri-State area of New York, Connecticut, Massachusetts area.

Jeff Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Understand. And then just 2 other ones here. On the bus market, do you expect any seasonality in that, from Q4 or Q1? Or would you expect that to start picking up? I mean clearly, some qualifications here but -- with Proterra and others, but what's kind of the rhythm of the business that you expect over the next 6 to 12 months?

Eric R. Ridenour

It's an excellent question, and I wish I knew. In fact, it triggers me that I should just find out a little more about it. Obviously, the -- with major buses, they have municipalities and they do buy in a cycle, and they normally buy. Once they sign up, they sign up for a multi-year contract. So once you have them in place, you tend to get not only this year but forward-looking to the following years, which is always good. I haven't had a discussion on those in particular. I've had it in the past, but not lately. And so I'm not sure where those are, but I will try and get that. And if you want, you can send me a note, and we'll try and see. But I'm just not familiar enough with municipal bus markets, especially the electric subsection of the municipal bus market, whether that's a cyclic business, and that follows a normal pattern or whether it will be unique.

Jeff Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Perfect. And then just the last one for Don, what was the actual number, I may have missed it in your comments, about the DOE reimbursement in the quarter?

Donald A. French

Okay, the actual amount of DOE reimbursements during the quarter were just shy of $1 million.

Operator

Our next question comes from line of Randy Hough with ProEquities.

Randall Hough

Eric, to you first, in your round up or summary prepared remarks at the beginning of the call, you went through a number of potential customers and gave them by name. And then in response to Mr. Lew's questions, you discussed those 1 or 2 up all over again. I haven't heard you mentioned Audi in those remarks at all. Can you give us an update on how Audi's development of the A1 e-tron is going and what you look forward to in that relationship?

Eric R. Ridenour

Yes, absolutely. The -- we actually met with Audi within the last 2 weeks in Ingolstadt. We had a team over going through Europe talking to many different customers over there. And obviously, we always talk with their -- all the ones that we already have along with all the ones we want to have and got a progress report. The vehicles are doing great. They're moving through their different phases. They're very happy with the build and the performances. They have some announcements coming up on what they're doing next. And because of that, it's partly why you didn't see anything because they've asked us, again, to not presage any of their forward-incoming stuff. But they're pretty happy with the program. I know there were some other news in the press that I've seen some people on other programs within Audi and some statements of VW. We don't think those impact the A1 e-tron whatsoever in that it is an extended range EV, with the range-extender concept that they're using, which is sort of a different way to do a plug-in hybrid, which is what -- the Wintercorn statement that was out there. So again, I just wanted, in case somebody read any of those things, that there's just still some concerns on range anxiety and other things. And their view is a predisposition toward things that gave customers extended range that would probably be more significant. If we can -- we agree that in general, that market is a bigger market because of that. But we still think the EV market, personally, is still very strong and will be amongst the number. But because that came up, I just thought I'd mention that. But we don't think the A1 -- in fact, again, we talked to the guys in the last 2 weeks and they certainly had no issues.

Randall Hough

Yes, I think it's pretty confirmed by what the company has put out, that they're going to go with these alternative hybrids PH EVs and see how they work and hopefully battery prices come down and then they'll make decisions in 2 or 3 years out as to what they're going to do with total EVs. But it does represent a pretty good size opportunity for us, and we just wanted to see what the -- if you're feeling good about the relationship and the opportunity going forward.

Eric R. Ridenour

Yes, we are.

Randall Hough

Okay, good. We've talked mostly on this call so far about automobiles and yet, there's a significant side of the story, UQM in my mind, with respect to light-medium duty trucks. And we came out with the 220 kW motor recently, announced it to the world with great fanfare. And I'm just wondering if you could give us some color, Eric, on the opportunity, the business opportunity, not only in China but in the U.S., which we haven't talked too much about the truck opportunity in the U.S. beyond UPS and Frito-Lay and FedEx. Are there any bushes stirring that you see that could work out for us in terms of additional opportunities with major names in the medium- and light-duty truck area?

Eric R. Ridenour

Yes, thanks, Randy, that's a great question. We see this really as one of the most significant things looking forward for us because the commercial truck sector is a very simple segment in that if you have lower total operating costs over the lifetime, you can win. And then you have all the things that we've talked about in the past that are there for everyone else, the green, the quiet, emissions-free in urban city centers and all those things. But the nice thing, and we've seen it, Fred Smith just talked about it in an interview he did I think on CNN in the last week, and we've certainly heard it from many of our other customers. So this isn't us or the EV makers saying these things. These are the actual customers, whether it be FedEx, UPS, Frito-Lay or others, but that essentially that when you have a fixed route fairly low mileage, which have a significant portion of the U.S. fleet is and European fleet and China fleet, you have the capability to size the battery appropriately. And when you do that, even at today's battery prices, you can have a very competitive cost model compared to diesel or other -- CNG or other things. And so that model alone will help. Just to dimension the market a little bit, there's like in the U.S, for instance, there is roughly a total fleet of about 11 million commercial vehicles, of that about 3.3 million or about 1/3 of them are medium-duty trucks, which is kind of what we're targeting. In addition, there's another 2.7 million of commercial vehicles in Europe. Most of those are smaller because they don't have the big over-the-road truck like we see here. So that's about 1 million medium-duty trucks are sold every year. And if you look at what percent you'd need to capture, Pike Research is one of the guys out there that does some of that. They estimate it's around 2% maybe by 2016, well, that's 16,000 electric vehicles. And if you just look at the propulsion system alone, the revenue for propulsion systems, somewhere in the $200 million to $300 million range, that's really close, and it's expected to have some pretty high component annual growth rate after that. We certainly know in our discussion with UPS, and as we've seen from others, that their decisions are going to be that they do this 100-unit test fleet. They're going to find out exactly how much of the vehicles can be electrified, and they're going to try and do as much as they can. Fred Smith did similar things for FedEx. And they're in longer route stuff to look at CNG and some other stuff. But within this market, they really see EVs as the best. So that's a huge market for us. And then the other market we talked about was obviously China. And again, that's a huge market. They're talking about getting 5 million new energy vehicles by 2020. So that puts you in the $1 trillion kind of total market. But if you just take the bus market, which is the one we're starting to look at that and commercial trucks both. But just picking the bus market, China builds about 60,000 buses per year, and there's projections there all over the map. But if you take a sanctuary [ph] to those, you get that somewhere between 30,000 to 40,000 of those buses are going to be new energy vehicle buses as part of this 5-year plan. Again, the thing we like about buses is they're bought by governments. And so if governments want a certain number of buses and the governments buy all the buses and the government has $15 billion to spend on buses, all that stuff comes together fairly well. So we like it for high yield. And if you just take the propulsion systems -- again, not the cost of the buses. But just the cost of the propulsion system, that's like $0.5 billion market if they hit the numbers that they're claiming they'll hit. So even if that's a smaller number, it's significant. And that's why we want to play in there, and we want to tie in with a major partner who can help us win. Obviously, the bus market is very localized over there, so you got to play with a lot of different smaller players, which is why trying to find one big guy that can help us reach a number of smaller guys makes some sense for us as a small company. But that's kind of what we're looking at. That's what we see out there and why we spend time on the 220 and why we've spent so much time working with all the different commercial vehicle customers.

Randall Hough

Okay, great answer. And so this -- that would take me then to, okay, there's a fairly good sized market -- in fact, exceptionally large market potential in the U.S. and China. And then, let me take you then to why UQM. We've seen, at least the first round, it seems to me after hanging around in this for 5 years that a lot of the players are already out there and have picked their propulsion system provider and are entering the market in various stages with their selection. Some UQM, some many others with some other supplier. And maybe some of them will come back to us, I don't know. But what makes us, in your mind, Eric, competitive in this pursuit of new relationships with the market you just described? What puts us in a position to be competitive to where we've got a good shot at picking up some significant business in the medium-duty truck market, both in the U.S. and China in terms of drivetrain characteristics over the [indiscernible] competitive offerings?

Eric R. Ridenour

Yes, I think the advantages are several and I think are as valid in the car market as they are in the truck market, and that goes with us being a full system provider, the fact that we have both the controller and the motor. And then we can custom tailor those for each of our customers. We have a very high total system efficiencies over a very wide map of different RPMs and speed load points. We have state-of-the-art control algorithms, and we are able to generate a competitive price. The feedback we get is that we're in the right price point. We don't have issues there, and we have these advantages. Those are the things that are going to help us, and I think the proof of that rather than just me saying it is just as simple as saying at Audi, Saab, Rolls-Royce, Hino, EV engineering out of Australia are all fairly global companies. None of them live here in Colorado, and all of them chose us to highlight their vehicles. And they saw something in that. Now you say what are the negatives? Why aren't there more? Well, I've -- on one point, I'll say that there's at least 2 or 3 guys who we're talking with who have gone with one of our competitors and now are talking to us. Hopefully, we'll be able to convert them, we'll see. It's part of our sales team's goals here. But we have things that are, again, that we have to work to be successful within OEBM [ph] just to give you a kind of a quick thumbnail. I would say this a few times, but I think it's always good to reiterate. What do you need to win? You need a strong product. That, we think we have. You need a competitive advantage in that strong product, and again, we think we have that. You need a history of production, you need timing and volume delivery, they need proof that you'll get there and deliver when you need them, how you need it. That's a work in process. As we get more customers and more time, we're going to have that history. But we don't have it yet, at least that higher volumes. They always ask for a warranty history. We're going to get that with time, but again, we can't short-circuit that. We've had a good warranty history, but again, it's in small numbers, and they want to see long time. They want you to be profitable, and we're working on that and we intend to be profitable. They want to see a strong balance sheet. We have a very good one versus some of our competitors, especially ones that are our size, but it's probably not as good as a $1 billion company might be. And they want you to be TS-16949 certified, which we're working on and expect to be through that process over this next year. And then we have a certain amount of time that we have to collect data before we can actually be certified, but that will be helpful. So the things that we're doing are the right things, and to win in the long term, we need all of them. The good news is because we're in an infant market and people are more focused on those first couple of strong product and competitive advantage, we're winning some battles that frankly would be hard to do. And so again, those are the challenges we have when we have the opportunities we have, and we intend to make the most of them. And the things we have yet to do, we intend to try and do as fast as we can.

Randall Hough

Great, that's inspiring. And which takes me to my last question. You've -- if I'm not mistaken, Eric, you've just passed your 2-year anniversary with the company, is that correct?

Eric R. Ridenour

Yes.

Randall Hough

Right. So let's just call this boot camp for the first 2 years, although you come -- you came to the company with something far beyond boot camp experience. But at least in this small company operation, with this market, away from the gasoline engines and all the rest you used to deal with at Chrysler, it was a bit new to you at least. I'll take that as a given. And I know you're excited about not too much the EV market, although that had some potential. You were more excited about the hybrids and PHEBs and what have you. Now that you've been there 2 years, the head of UQM, Eric, what's your feeling about the decision to come with UQM and get into this market in terms of its -- being an opportunity to meet your goals and objectives personally when you signed on?

Eric R. Ridenour

Well, that's a fantastic question. I think that a couple of things are one is that if the -- it'd be clear, it's not that we think hybrids will be better. We just think that because they have -- they appeal to a broader audience base that there'll probably be higher volumes over time. But we also believe that electric vehicles, for a significant portion of the population, will also be an excellent vehicle, especially low-mileage commute to work, second vehicle for kids and groceries and those kinds of things and other aspects where you're in high-density areas, where you stop start and all that and quiet operations are really nice. And so, again, we see both of those playing out very well. I would say that the couple of things after a couple of years what would just say versus what your initial expectations is that I think the external drivers are bigger than ever. I think that there's more potential in -- between regulatory policy, government policy, individual, green feelings and other things. And so those kind of drivers are stronger. I think that all new markets have fits and starts and dead ends and other things, and we've seen that over the last couple of years for some players and some segments and some pieces. I think overall, progress has been good. But certainly, I never would have thought the media darling would be to go opposite, especially where they are when they profess so many things, and then attack electric vehicles and sometimes without facts. But that's the way it is. And I've watched this business for a long time. And normally whenever you have had your time in the barrel, you get out of the barrel and it's somebody else's turn to be in the barrel. And so I expect that we'll see the ebb and flow, and we'll start seeing positive articles, and people want to be writing different. They sort of have the flock mentality of journalists that, "I write what other people write because then I'm comfortable". And then every once in a while, you get the new guy, and he wants to write the counter-story. And then other people want to be like him, and they go the other way, and you see that whether it's in the political debate, whether you watch it in new market segments and all that. So I came because I thought it'd be interesting and challenging, and all that is still very true. And so again, pleased to be here. Looking forward to a bright future. We got a lot of work to do, and we intend to do that. I feel very good we've put a lot of the foundation that we need, and we've got a lot of the stuff that, as I gave you my quick list, a lot of stuff absolutely move in the right direction and more work yet to do on some of them. But that's -- we know that, that's clear. And we'll do that.

Operator

[Operator Instructions] Our next question comes from the line Bruce Kersley [ph], private investor.

Unknown Attendee

Eric, it's Bruce [ph]. Have we not received payments from CODA according to our agreement for motors that have been shipped to them?

Eric R. Ridenour

Yes, as we've mentioned, they are behind in payments. It's not the first person who's been behind in payments, but since they are currently, we wanted to footnote that.

Unknown Attendee

And my second question was about the onboard vehicle generation, power generation service. Could you give some color on that to explain what that's about?

Eric R. Ridenour

Are you talking about -- it's a couple of different things. Like some of the hybrids in that have the ability to do like contractor power and that kind of thing at site. Is that what you're discussing?

Unknown Attendee

No, there's a -- we have service contract with the government or agency or whatever, but developing onboard power generation, the way it's put in the...

Eric R. Ridenour

Right. Sorry, that's the Southwest Research. Sorry, I was just -- my head was still on commercial trucks. Jon can talk about that, he's here. Jon Lutz, our VP of Engineering.

Jon Lutz

Yes, that's a high-power generator for use onboard military vehicles.

Eric R. Ridenour

What would you like specifically...

Unknown Attendee

No, I -- but how big a contract is that, and when do you expect to be able to complete it?

Jon Lutz

Well, it's a development project. It's less than $1 million, but it's approaching $1 million contract to develop that unit.

Operator

Our next question comes from line of Keith Brown [ph], private investor.

Unknown Attendee

I have 2 questions. One, when do you see yourself going to a second shift on the production line and when do you see the company go into a new production line building motors?

Eric R. Ridenour

From the standpoint of the second shift, obviously, we need to get a bigger volume than we have. The good news is we have significant capacity. We have 20,000 units on one shift, which is always the intent to be able to handle CODA as they got to their highest anticipated volumes. And then the intent was to run on the single shift, but then if we had additional customers, for instance, Saab or others who were using that same line and others that we've talked about through time, they would either fill in to the first shift or then go on to the second shift as that came. At this point, if some time in the future we don't have a specific projection. And then from the standpoint of a second line, we're certainly looking at that within the standpoint of the 220, which is a large frame motor size that will have its own production line. And we're just working right now because we have, as we talked about quite a few customers talking to us, we're trying to figure out the combined capacity we'd need that makes the most sense and have the best efficiency versus capacity breakpoint and then put that in place. So that will be coming. We haven't made a specific date yet, but we're in the process of working through those on a planning basis right now.

Unknown Attendee

Do you see that happening in this calendar year?

Eric R. Ridenour

It could. It most likely will from an actual installation, all that will most likely be next calendar year. But the planning and all that is active now, and some pieces of that could be put in place yet this year.

Operator

Our next question comes from the line of John [indiscernible], private investor.

Unknown Attendee

I've got just 2 questions. What's going on with the electric Hummer competition, the military version?

Eric R. Ridenour

That one is a riddle within because of the -- they've made a sub-selection. And again, we've talked about we're in the last 3. They made a sub-selection. We're not in those, but we've done work with some of those. And what we're looking for is to whether the specifications are being redone, and we're trying to figure out in that whether there's still room for an option for our system that we had worked on. So at this point, we're on the outside looking in. But we're still working because obviously we -- it's a significant contract. And we think we know at least one of the competitors has an option to do some things electrified within it. And so we're trying to see if all the guys would like to play in that game. So again, we're not in at the moment, but we'd certainly like to try and be in at least a portion.

Unknown Attendee

I see. Okay, and my other question had to do with the -- what's going on this sort of -- can you give me a short status on the non-rare earth motor?

Eric R. Ridenour

We've had good progress on that. We just had a recent DOE review, and it went very well. We are close to reaching some milestones from the standpoint of getting through different phases. I'd say stay tuned. We are looking forward, but progress has been good.

Operator

Our next question comes from line of Ken Young [ph].

Unknown Attendee

When you are going through the milestones with regard to the anonymous Chinese company that you're working with, you mentioned something about government approval. Are we talking about the Chinese government, the U.S. government or both? And are these things that take forever to get done?

Eric R. Ridenour

The -- to do business in China always requires approvals of the Chinese government whatever you're doing. They can be fairly quick, and they can be very long and arduous. The good news is that in the -- it depends on whether you're helping their mission or not. And because right now they have a very strong focus on bringing electric vehicles to the forefront and bringing the technologies into China and other things, we would hope to have a fairly easy path through that approval process. But again, you're dealing with the government. And as we all know, they don't always move quite as quickly as you'd like. The idea of having a strong partner is extremely helpful because obviously they know many more people and can help kind of grease the skids for all that and they also know what the government's looking for. So that's one of the reasons why we said early on we wanted to work with a partner to help that. So again, we haven't made a full decision yet on whether we'll do this on the project-by-project or whether we'll do it as a joint venture. And all those have different ramifications. Obviously, some can be a little quicker than others, but those were the things we're going to be working on in those next few weeks that we talked about at the next stage.

Unknown Attendee

All right. This may be my prejudice showing, but my sense of things is that the Chinese have a bit of a reputation for reverse engineering and counterfeiting. Is this anything that's a concern to you with regard to your proprietary technology?

Eric R. Ridenour

Yes, we go in definitely with our eyes wide open on that. Those are very real issues, not just hearsay, but very real issues. What we're looking on is a series of different things that help protect it. Obviously, the pure reverse engineering of measuring your shaft diameter and copying it is not much we can do about that. They can just by a CODA car and have our motor or buy a Proterra bus or buy an EVI vehicle. But the software and the code and the algorithms are much, much tougher. And we're looking at additional enhancements with encryption technologies and other things to make that even tougher. So that will be something we would protect and make sure it's only here in the U.S., right here at our facility, and that we would provide completed sets. So there's no chance of that software being in the wrong hands. And those are the kinds of things you have to do, but again, eyes wide open.

Unknown Attendee

Okay. My final question, I didn't hear anything about UQM's relationship with Aetna, which seems to me in the past was pretty strong. Is that still an ongoing situation?

Eric R. Ridenour

I think you mean with Eaton?

Unknown Attendee

Eaton. I'm sorry, Eaton, I meant.

Eric R. Ridenour

Yes. I was thinking the insurance guys have said, "Okay, what do we do now?" Now, with Eaton, we're still having good conversations. In fact, they've had some changes in people, and we've had very good new conversations, again reenergizing a few things that we've talked about in the past. So that relationship continues. We continue to sell DC-to-DC converters through them to their ultimate customers. But we're working at least talking on a few other things, and so stay tuned.

Operator

And our final question comes from the line of Randy Hough.

Randall Hough

Just to follow up on that fellow that asked about the army contract with the Humvee, there's been a lot of decisions here recently on the Joint Light Tactical Vehicle, and I know we were competing in that. And I happen to be at a conference recently where it was discussed in detail by some people from the U.S. government. And it appears that 3 were chosen, if I've got this right, [indiscernible] correct me. Three companies were chosen but none had a solution that was based on electrification of the vehicle. They were all traditional diesel engine solutions. But that is still open, and I'm aware of one company that did compete within electric or hybrid electric solution that still believes there's opportunity there. Can you give us an update on that?

Eric R. Ridenour

Well, yes, that's exactly what I was trying to discuss was that we know there is at least one. So while the main spec wasn't looking for it, there is at least one who thought it was beneficial. And so we're re-talking with potential partners about their versions, and there's -- should they have a similar feature or other kinds of features. So what we think is that they might have made a decision -- we know that they were pushing honestly in these times for reduced costs, and so I think the base vehicle has become simpler on a number of parameters, one of them being I think the electrification portion. But what we're hoping is that, as an option, that some of the vehicles might still be able to be having some electric features, whether it's onboard power generation or whether it's hybrid or others. And we're still talking to people to see. But again, at this moment, just in full disclosure, we're on -- with one of the selected ones wasn't our particular one.

Randall Hough

Right, of the JLTV?

Eric R. Ridenour

Correct.

All right. Thank you very much, we appreciate it. And again, we look forward to continuing to work through the challenges, continue to work on all the different aspects that we know that we're required to make us successful. And we've had a lot of good discussions in Europe, in China and here in the U.S. And so we're going to continue to work hard on all of those. And with that, I thank you, and we close the conversation for this afternoon.

Operator

Ladies and gentlemen, this concludes our conference call for today. If you like to listen to a replay of today's conference, please dial (303) 590-3030 or 1 (800) 406-7325 using the access code of 4570874. That concludes our conference today. You may now disconnect.

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